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October 11, 2007

Free Wi-Fi from Starbucks? Ha

Update: 2008-09-24: It has come to my attention that links to this post are attempting to paint me, after the fact, as being wrong about everything because I said Starbucks wouldn't offer free Wi-Fi in 2008. This requires me to set the record straight.

In the post below, I spell out why Mike Elgan was incorrect about Starbucks planning to give Wi-Fi away for free. I stand by that logic. What happened, rather, is that Starbucks switched its provider from T-Mobile to AT&T, and both firms are giving away service--but not quite at no cost.

AT&T is offering free Wi-Fi to all its DSL subscribers and fiber-optic customers. They receive monthly fees from those users, and turned on the Starbucks tap (along with 10,000 McDonald's locations they purchase access to from their services partner Wayport) as a way to reduce churn. It's a marketing expense, and not very expensive. It's not free--it's free to AT&T high-speed subscribers. Starbucks isn't paying for that "free" service.

Likewise, Starbucks isn't giving away access; they're rewarding loyalty. Again, it's a marketing expense. You have to make a purchase every 30 days on a Starbucks Card to obtain two continuous hours of access each day for the following 30 days. That's a bonus, but it's not precisely free.

In both cases, the companies get a windfall from providing a service at no extra charge. Elgan and others were speculating that Starbucks would go entirely free: no purchases, no loyalty, no cost. Didn't happen.

As I note in the conclusion below, Starbucks would have had to pay millions to T-Mobile to offer a no-cost network; instead, the deal with AT&T is clearly more favorable. Starbucks may have negotiated some or no payment for its own loyalty program, but over 12m AT&T subscribers were brought onboard by that firm, which certainly was a motivating factor for Starbucks to change over.

I don't mean to be picky, but free Wi-Fi at Starbucks? Ha. It. Didn't Happen.

Let's get to facts about who operates this network first. Elgan says that Starbucks offers Wi-Fi along with partners T-Mobile and HP. Now, I don't know how HP wound up getting its name inserted in there--Compaq had a multi-year supplier deal with Starbucks that HP acquired in the merger--but T-Mobile is the Wi-Fi provider; Starbucks is its customer, perhaps branded as a "partner," because Starbucks remains the single largest tenant on the T-Mobile USA HotSpot network, and a significant customer in Europe, too.

Elgan says we get free Wi-Fi of a sort already: with the right gear, you can buy songs from Apple via iTunes over a Starbucks-located T-Mobile hotspot. Right. And I can drink my own coffee in Starbucks, too, as long as I purchase it from them. Not really the same as free Wi-Fi when it's simply an alternate retail delivery channel for digital media--not Internet access.

The reason that Elgan thinks that Starbucks might go free is because of McDonald's: the two giant chains now compete in some categories, with McDonald's providing pretty good coffee and Starbucks offering things that resemble upscale Egg McMuffins.

Here's where things go off the rails. Elgan writes that with UK McDonald's offering free Wi-Fi over the coming months, that the quick-service restaurant franchiser and owner will "gradually roll out Wi-Fi at restaurants in other countries--including in the U.S." Mike, sorry to tell you this: McDonald's has Wi-Fi at over 8,000 locations in the U.S., with Wayport providing the service. McDonald's uses it for internal purposes, AT&T resells it for $0 to $2 to its DSL customers as part of AT&T WiFi, Nintendo DS users access it for free (since 2005), and so on. (McDonald's has over 15,000 restaurants unwired worldwide.)

This rollout started in 2004 after a heated competition among Cometa, Toshiba, and Wayport. Wayport won. Toshiba exited the business. Cometa shut down. Man, I wrote a lot about that back then. How soon we forget.

Also important to recall that McDonald's is organized into national divisions, and it's unlikely that a directive would spread worldwide for something like Wi-Fi access, which intersects with culture and technology in each country. Ditto, T-Mobile, which has a separate U.S. organization, and sells hotspot access on a separate basis in the U.S. from its European operations. (There's a roaming deal that's purely on a metered basis between T-Mobile's European and U.S. Wi-Fi customers.) In the UK, hourly charges for Wi-Fi are ridiculously high (several pounds an hour isn't unheard of), and there's a countervailing movement to bring more free Wi-Fi to the front, as well as inexpensive unlimited plans; thus, McDonald's UK hopping on that trend.

I have never had a conversation with T-Mobile about its hotspot network in which it wasn't made clear that they were perfectly happy, if not occasionally ecstatic, about the usage, its growth, and the resultant effect on their segment of the corporate bottomline, even though I've never been told dollar figures. Occasionally, T-Mobile releases usage numbers, and they're awfully good. That's partly because T-Mobile's network is designed to reduce churn and retain customers. Customers who pay the $30 per month as voice subscribers for unlimited EDGE and unlimited Wi-Fi must be fairly happy--and they're not paying $6/hour to use a Starbucks Wi-Fi network, either.

If Starbucks went free, T-Mobile would lose a large portion of its customers paying it for unlimited Wi-Fi. And their churn would increase. And they'd lose the portion of walk-up dollars, which is probably a decent amount in the several airports they cover. Thus Starbucks would need to pay T-Mobile a fairly significant amount of money, perhaps tens of millions of dollars a year, if that money could begin to cover long-term customer retention on top of real revenue.